31st August 2021 / Tax

Phase two of Making Tax Digital for VAT is fast approaching

Making Tax Digital for VAT has been in place for some time now for businesses that have a turnover in excess of £85,000 per annum. Now, phase 2 is nearly upon us. From 1st April 2022, all VAT registered businesses must sign up for MTD for VAT.

So this now means that those VAT registered businesses with a turnover of less than £85,000 will now need to switch over to Making Tax Digital. Any business that is VAT registered needs to be aware of the requirements we’ve outlined below. However, for a business to just about to meet the VAT threshold these are the three key elements that you will need to be aware of to meet HMRC requirements:

  • Keep records of sales and purchases – you will find more detailed information on HMRC’s website.

  • Keep a separate summary of VAT. This is called a VAT account.

  • Ensure that you issue correct VAT invoices on your sales.

What are the rules for Making Tax Digital for VAT?

Your sales and purchase records MUST be kept digitally using approved software and the digital record must include the following:

  • Your business name, address and VAT registration number.

  • The VAT scheme that you are using – standard, margin or flat rate scheme.

  • The digital record on your sales invoice should be a valid VAT invoice or sales receipt and include the date of supply, the net sale value, the VAT amount charged and the gross sale value.

  • As above with sales, for your purchases, you must obtain a valid VAT invoice or receipt from the service supplier.

  • You must keep a record of your daily gross takings if you use a retail scheme.

  • The item that you can reclaim VAT on - if you are using a flat rate scheme.

  • Any adjustments you make to a return.

  • Any reverse charge transactions – the VAT needs to be recorded on both the sale price and the purchase price.

Of course, this is just a general overview to serve as a recap. You will find more detailed information over on the HMRC website.

Do I still need to keep paper records after Making Tax Digital?

HMRC state that you must keep records for six years after the end of the relevant financial year. Records must be accurate, complete and readable. Penalties can be imposed in the event of an inspection if records are not available or legible.

So while it isn’t essential that you attach your purchase invoice to a digital record it is more efficient for you to do so. There are a range of software options that can be used to digitise your purchase invoices ensuring that in the event of an inspection the corresponding purchase invoice is “available and legible”.

There are additional benefits in attaching the paper receipt to the digital record and having the record stored digitally “in the Cloud”, these include:

  • Meeting GDPR compliance and confidentiality rules

  • Document security

  • Ease of access to review your financial records

  • Saves internal office space

  • Less paper – reduces the carbon footprint

  • Saves Time

  • Saves money

  • Improves organisation

  • Improved collaboration

  • Access to your financial information, anytime, anywhere with an Internet connection.

Moving your financial records to the cloud is a major step towards operating a paperless office and with all of the apps now available couldn’t be easier.

On the whole, the MTD for VAT process has been pretty well dealt with by larger organisations. They tend to have the expertise and budgets in their business to manage change. However, for the smaller business that will be impacted from April 2022 or for businesses that are about to make the transition to being VAT registered, this can be quite a daunting process. That's where we can help.

Geoff Selby, Business Director

We can help guide you through the transition from paper and manual systems to the cloud so if you want to find out more about using accounting software that will help save you time and take away the manual burden of filling out a digital record then please contact the team.

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